Three AIM stars of the future

It has been a rollercoaster week for the markets since the decision of a majority of the British public to vote to leave the European Union, and AIM has not been immune. The FTSE 100 index, which is made up of multinational firms, has clawed back all of its early losses and one week after the referendum it is 3.4% higher.

AIM, in contrast, is down by 2.2% over the week. After the first two days of trading following the referendum, AIM had fallen by around 7%, so this still represents a strong recovery in the following three days. The AIM 50 has done better than the junior market as a whole. It has fallen by 0.8% and it has barely changed over the past year.

What is interesting is that the one major UK index that has risen by more than the FTSE 100 is techMARK, which is 4% ahead in the past week. It is also the only one that is higher now than it was one year ago.

It appears that pharma companies are doing much better than those from other sectors. Five out of the best six performing techMARK companies are in the pharma sector and they have all risen over the week. They include Shire, AstraZeneca and GlaxoSmithkline. The non-pharma company is ARM. Vodafone is also higher and it will have a significant influence because of its large weighting in the techMARK index - as well as the FTSE 100.

The larger fallers in the FTSE 100 are in the financials, housebuilding, airlines and retail sectors. The better performers are mining, pharma and multinational consumer businesses, such as Diageo and Unilever.

AIM casualties

There are not as many large financials businesses on AIM, but Secure Trust and Arbuthnot Banking are both well down on the week, as is the much smaller, Gibraltar-based pension and financial services firm STM. Residential property developer Telford Homes has also fallen sharply.

The largest faller amongst the larger AIM companies is recruitment firm Staffline, which recruits outside of the UK. Staffline has lost more than one-third of its value in one week. Property lettings firm Martinco has lost about one-fifth of its value.

Professional services company WYG, which gains work on EU-funded international projects, and Flowtech Fluidpower, which has a significant Benelux-based business, are also amongst the main fallers.

The risers among the AIM 50 include mining companies and particularly pharma-related businesses, including GW Pharmaceuticals, Abcam and Clinigen. The international spread of Abcam and Clinigen is an attraction.

Companies with good balance sheets and strong cash flow will be able to weather the Brexit storms that are likely to happen over the next two years or so. While having cash in the bank is a good thing, though, in the current economic climate it appears that companies will be getting even less income on their cash piles if interest rates do come down. It is hard to believe interest income could get any lower, but it appears it could!

There are still plenty of opportunities to invest in companies that have good growth prospects some of which have become more attractive because of lower valuations.

Safestay

50.5p

Safestay provides upmarket hostel accommodation in the UK and around four-fifths of its customers are from overseas. There are currently four sites - York, Edinburgh and two in London. The decline in sterling will make the UK a more attractive destination for tourists and this should help demand for Safestay's accommodation. This type of business can increase profitability significantly with increases in occupancy levels.

Safestay is a spin-off from property investment company Safeland, which has built up a number of successful property-backed businesses such as self-storage sites operator Safestore and workspace provider Bizzbuild. Safeland's property expertise is enhanced by employing management with commercial hotel skills.

The downside of the currency movements could be felt in terms of acquisitions. Safestay plans to expand outside of the UK and acquisitions on the continent could become dearer in terms of sterling. There is no specific acquisition at the moment, but Safestay has been working on potential acquisitions and sites so the viability of any of these may need to be reassessed.

In reality, Safestay has the expertise to find appropriate sites that can still be commercially attractive. House broker Cantor Fitzgerald believes that Safestay will fund a continental European acquisition with Euro-denominated debt.

The initial focus may be to add to the Elephant & Castle and Holland Park sites and take the total number of sites in London to four. The long-term strategy is to build up a portfolio of 20-25 hostels in key European cities. Safestay is expected to move into profit this year and is forecast to make a profit of £2 million in 2018, although the business is likely to be different by then because of further acquisitions. The net asset value of 48p a share covers most of the current share price.

Clinigen

605p

Pharmaceuticals and pharma services provider Clinigen has been highly acquisitive since joining AIM and has the potential to grow rapidly even if the economy is weak. Demand for its pharma services is strong and the growing portfolio of speciality pharmaceuticals will lead to a much higher profit contribution from the division.

The clinical trial services division sources and manages the supply of comparator drugs to pharma companies undertaking clinical trials. The managed access division provides early access to pre-approved medicines in markets where they are not currently available.

The global access division provides healthcare professionals to gain access to unlicensed medicines around the world. Many of these treatments do not have a large enough market to be launched commercially or are difficult to source. Revenues can be lumpy based on timing and size of contracts. Link, which was acquired last October, has a similar business to the global access division with particular exposure to Asia, Africa and Australasia.

Speciality pharma is building up a portfolio of niche hospital-only medicines. This is a high margin business so growth in this division can provide a significant boost to profit. Human herpes virus treatment Foscavir is still the main revenue generator and this is a weakness, particularly with potential competition on the horizon, but further drug purchases will limit the exposure. The strategy is to build up a portfolio of ten drugs, which is double the current level. More acquisitions are likely and this business already contributes one-third of profit.

Net debt of £76.1 million is forecast for the end of June 2016, falling to £33.7 million by June 2017 even though there is a growing dividend payment. That shows the cash generative attributes of the business. If no other acquisitions were made then Clinigen would be cash rich in a couple of years.

There has already been a significant bounce back in the Clinigen share price - it is trading on around 15 times 2016-17 prospective earnings - but it is still an attractive long-term investment.

Red24

16.25p

Security and risk services provider Red24 is a small company with an international spread of activities and the majority of its revenues are earned in US dollars. Last year, it managed to cope with the loss of its contract to provide travel assistance products to HSBC clients, which at one time was a major part of the business.

The customer base of the travel assistance division is much wider and is not dependent on financial businesses. Retailers subscribe to the service for their buyers who travel the world to order goods. This is a high margin business.

The acquisition of Singapore-based investigations business RISQ Worldwide, included for nine months, gives Red24 an Asian base and the company will be rebranded as part of the group. This takes Red24 into new markets, such as corporate investigations and employee screening, and provides cross-selling opportunities both in product and geographic terms.

The latest figures do show the problems with trying to second guess currencies. Red24 has crisis response management centre in South Africa and it hedged its Rand exposure during last year's General Election. That led to a £167,000 loss. This and acquisition-related adjustments led to a dip in pre-tax profit from £1.07 million to £624,000. Stripping out the exceptionals there was a small decline in profit. The dividend rose 10% to 0.55p a share. A 2016-17 profit of £1.4 million is forecast, which puts the shares on seven times prospective earnings.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.